The Risky Groupon Initiative That Beat Back LivingSocial Perhaps Once and for All

Since Groupon’s earliest days, there was always one constant: It would almost never take less than 30 percent of the proceeds from the daily deals it sold on behalf of its small-business clients.

Even as competition in the deals space ramped up, Groupon stuck to its guns and its cut of revenue. You can always cut margins, but increasing them once you decrease them can be tricky.

But, last year, Groupon’s management caved, according to current and former Groupon employees. The thinking among its local sales teams in the U.S. was simple: Let us drop margins temporarily, and we’ll grab the best customers from LivingSocial and other competitors, as we’ll eliminate the price argument we sometimes lose business on.

Groupon’s sales teams also identified other top-prospect businesses that had either never run a daily deal or hadn’t in a long time. Management approved take-rate cuts on a case-by-case basis for those businesses, as well.

Sources tell AllThingsD that, over a period of several months, Groupon launched a coordinated and focused price-cutting attack in the U.S. After maintaining take rates of 43 percent and 44 percent respectively on North American local and travel deals in the first two quarters of 2012, those cuts of revenue dropped to 38 percent in the third quarter, and then 32 percent in the fourth, according to a recent Morgan Stanley research report, as Groupon looked to increase the amount of deals in its fledgling deals marketplace, and to steal business from LivingSocial.

During the campaign, Groupon permitted its sales reps to drop in some cases the cut of revenue it took on deals with targeted merchants to as low as five percent or 10 percent.

Groupon alluded to the price cuts during its fourth-quarter earnings call earlier this year; Wall Street subsequently pummeled the stock, as news of the lower take rates was compounded by a bad earnings miss.

But it has since become clear that the initiative was actually successful for the deals company on two important fronts.

One result, according to multiple sources, was that Groupon did indeed drastically increase the number of businesses it worked with. “The broad view was that it was hugely successful,” Groupon spokesman Paul Taaffe said in an email confirming the initiative.

And, while Taaffe said the campaign mainly brought in merchants who were new to daily deals or hadn’t run one since the early days of the phenomenon, several former Groupon and LivingSocial employees said that the initiative was also a big blow to LivingSocial, as Groupon began winning business on price that it used to pass up. Despite the significant challenges Groupon still faces, sources said that this targeted price-cutting initiative is a big reason why Groupon has been able to distance itself from its one-time threatening competitor LivingSocial.

One way the disparity between Groupon and LivingSocial is clear is on revenue alone. Through the first nine months of the year, Groupon recorded $1.8 billion in revenue, compared to $384 million for LivingSocial.

A recent survey of 1,540 consumers by RBC Capital Markets also shows a gap in deals-purchase behavior: 72 percent of respondents had purchased a deal from Groupon in the last 12 months, compared to 36 percent who had purchased a LivingSocial deal.

Since the campaign ended, Groupon has been able to once again boost its take rate on local and travel deals in North America to the high 30 percents, according to the Morgan Stanley research report — not quite what it once was, but higher than during the initiative.

And, though Groupon’s stock price is still less than half of what it was at its IPO, it has more than doubled since the aftermath of the fourth-quarter earnings call, when the company first mentioned the price cuts.

Update: A LivingSocial spokeswoman declined to comment. “We can’t comment on Groupon’s business,” she wrote in an email.

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